Digital Media Mergers: Theory and Application to Facebook-Instagram

Justin Katz and Hunt Allcott

No 34028, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present a new model of competition between digital media platforms with targeted advertising. The model adds new insights around how user heterogeneity and overlap, along with user and advertiser substitution patterns, determine equilibrium ad load. We apply the model to evaluate the proposed separation of Facebook and Instagram. We estimate structural parameters using evidence on diminishing returns to advertising from a new randomized experiment and information on user overlap, diversion ratios, and price elasticity from earlier experiments. In counterfactual simulations, a Facebook-Instagram separation increases ad loads, transferring surplus from platforms and users to advertisers, with limited total surplus effects.

JEL-codes: D12 L1 L4 L86 (search for similar items in EconPapers)
Date: 2025-07
Note: IO
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